KARACHI: The unexpected drastic cut in the cut-off yield on the Pakistan Investment Bonds surprised the market while the State Bank raised more than the target set for the entire quarter, from November to January.

It was an unusual day for the bonds market as they were expecting a cut in the PIBs rate after the discount rate was reduced by 50 basis points to 9.5 per cent on Nov 15. The cut-off yield on three-year PIBs was, however, slashed by 1.59pc to 10.89pc, for five-year PIBs by 1.87pc to 11.10pc and for 10-year by 1.45pc to 11.99pc.

The rates were not slashed at this level for several years, said the market dealers.

The State Bank kept the policy interest rate unchanged for almost a year which supported the PIBs to remain attractive with high rates not available anywhere in the market.

The government made the PIBs main instrument to raise money which benefited banks but deprived the private sector of banking money.

The government came under severe criticism for borrowing costlier money while cheaper money was available through treasury bills.

Experts said the government was trying to avoid short-term repayment problem by adopting long-term borrowing through PIBs.

The government raised Rs3.514 trillion through PIBs till the end of Oct 31 while most of the money was raised in FY-14.

However, it slowed down the PIBs selling and set a relatively small target of Rs150bn for the quarter from November to January. But the State Bank picked more than the entire target of the quarter which was out of mind for the market dealers.

Dealers said they were expecting auction of Rs50bn PIBs on Wednesday which developed a kind of competition among primary dealers and they kept their bids at much lower rates to buy the PIBs. However, the State Bank surprised the market by raising almost all amount.

The State Bank raised Rs72.2bn for three-year PIBs, Rs27.7bn for five-year PIBs and Rs50.4bn for 10-year PIBs. The total amount raised was Rs150.3bn.

“This was an odd day for us. We were not expecting such a move which shocked the market,” said S S Iqbal, a fund manager.

He said the market was expecting a cut in the PIBs rate in the light of recently reduced policy interest rate.

The market dealers said the rates would be revived in the next auction and more possibly the rate could be increased. However, they also have realisation that inflation has been falling and if it continuous to fall in the coming months, the interest rate could see another cut that may not help the PIBs’ lovers.

Published in Dawn, November 20th , 2014